The commodity markets saw a choppy 2013, with soft commodities -
coffee in particular - lacking luster. A supply glut resulted in a
20% decline in the price of the commodity last year. This is, in
fact, the third consecutive year of negative performance from
However, toward the beginning of last month, the robusta variety of
coffee saw some strength. The upside can be partially attributed to
the seasonal demand pattern, wherein the cold December month
usually gives coffee prices a boost.
The rise in coffee prices also led popular coffee exchange-traded
Dow Jones-UBS Coffee ETN
Pure Beta Coffee ETN
) to clock unexpected marginal positive returns last month (read:
3 Commodity ETFs to Watch in 2014
However, the real reason for the price rise was blamed on a supply
shortage. Vietnamese farmers had deliberately held back supplies to
lift the rock bottom coffee prices. The artificial supply shortfall
increased the demand for the Arabica variety of coffee.
Are the recent higher prices sustainable?
Experts believe that Brazil, the biggest producer and exporter of
the premium Arabica beans on earth, will post another record year
of production in 2014 due to solid crop conditions. Extensive
rainfall forecast in some parts of Brazil over the next few days is
expected to make the texture of soil ideal for coffee plantation.
Moreover, harvest in Colombia, the second-biggest Arabica producer
after Brazil, is also expected to be quite strong.
The U.S. Department of Agriculture forecasts that the global
production, including the robusta variety will surpass coffee
demand during the 2013-2014 season by 6.04 million bags (read:
Coffee ETFs: More Weakness Ahead?
This will push inventories to a five-year high, with global coffee
stockpiles set to rise by 7.5% to 36.3 million bags. This expected
bumper Brazilian coffee production could lower prices.
The real culprit
The cause for this present oversupply condition can be traced back
to a price rally in 2011, which encouraged producers to plant more.
As the coffee plant needs a few years to grow and currently we are
in the midst of the 2011 plantation, the supple glut is expected to
continue at least through 2014.
Not only is bumper production a key factor for the lackluster
outlook for coffee prices, the sluggish consumption pattern is also
to be blamed. Global coffee consumption in 2013-2014 is expected to
rise only moderately to 141.9 million bags from 141.6 million bags
The moderate rise in the global coffee consumption can be
attributed to lackluster consumption patterns in EU - the largest
coffee consumer - and the U.S. However, consumption in the BRIC
nations is expected to rise moderately.
The depreciation of the Brazilian Real is also considered as a
factor impacting coffee prices. A weaker currency allows exporting
countries to sell higher amounts which in turn increase
availability in the market but at the same time weigh upon
The demand, supply and the currency effect which also played a
dampening role on coffee prices during 2013, resulted in a
downslide in JO and CAFE ETFs.
Both the ETFs fell more than 30% in the last one year. In fact, JO
delivered a massive negative return of 65.70% in the last three
3 Commodity ETFs Surging Higher
Easing of supply concerns from Vietnam led to a 4.6% fall in JO and
3.7% fall in CAFE in the last one week.
As this sluggish trend is unlikely to reverse before mid-2014, we
caution investors who still are long on coffee instead of shorting
the product. As such, both JO and CAFE currently carry a Zacks ETF
Rank of 5 or 'Strong Sell', indicating that the funds might face
significant bearishness in the months ahead.
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IPATH-PB COFFEE (CAFE): ETF Research Reports
IPATH-DJ-A COFE (JO): ETF Research Reports
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